In 2005, a debtor issued bonds to expand its business, and a bond trustee was appointed (primary creditor). The debtor ultimately defaulted on this loan. Later, in 2008, the debtor entered into an agreement with a company (secondary creditor) that provided operational and management services. In 2009, that agreement was terminated, but the debtor still owed money to the secondary creditor. In 2019, the secondary creditor obtained a stipulated judgment for the funds during a mediation with the debtor and with the authorization of the primary creditor. However, the secondary creditor did not receive payment. The secondary creditor commenced an action demanding payment in full and priority above the primary creditor’s interest. The debtor and the primary creditor opposed this and, in turn, filed a motion to dismiss, arguing that the secondary creditor’s rights were secondary to the rights of the primary creditor.
In Avcorr Management LLC v. Central Falls Detention Facility Corp., No. PC-2023-02605, 2024 R.I. Super. LEXIS 76 (R.I. Super. Ct. Aug. 27, 2024) (opinion not yet released for publication), the Superior Court of Rhode Island, Providence, partially granted the motion to dismiss, finding that the secondary creditor could not enforce its judgment against the debtor without the permission of the primary creditor. Adhering to traditional commercial laws, the court determined that the primary creditor’s rights were superior to the secondary creditor’s rights because the primary creditor perfected its security interest first in 2005. The court reasoned that the primary creditor had the right to “determine the proper course of action” upon default of the debtor. The primary creditor chose to work with the debtor instead of collecting on the outstanding debts, arguing its best chance of a full recovery was to let the debtor corporation continue operating. Thus, the court said that the secondary creditor could not force the sale of the assets to recover its funds because the primary creditor held and exercised the right of disposition upon default. However, the court did mention that the secondary creditor may be able to hold the primary creditor liable for the debtor’s obligations under the doctrine of equitable subordination, because the primary creditor has likely exercised excessive control over the debtor’s business. However, this issue was not decided by the court.
By Maycee Redfearn [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott: [email protected]